Lean Advantage in a Flat World

It’s not every day that I agree with Tom Friedman, but his October 6th column on Big Ideas and No Boundaries is pretty much right on the money. He talks about the benefits of free trade, and more importantly why restricting free trade is purely self-defeating in an already-globalized world. As he correctly points out,

"Whatever can be done will be done by someone, somewhere. The only question is whether it will be done by you or to you."

It’s already here. Free trade is not the realm of large multinationals, but the opportunity of the smaller businesses that employ the vast majority of our workers. "Opportunity" and not "battlefield." Friedman gives a couple examples of small companies in Nebraska and Silicon Valley that are buying from vendors and selling to customers at other ends of the globe. Having access to those services and markets helps them grow, which helps them employ more people and invest more in new technologies.

"The way you keep good jobs in America is not by building big walls, but by attracting people with big ideas – and then giving them the freedom to do whatever can be done with anyone, anywhere, anytime."

There are companies that have taken the victim attitude and believe they can’t compete with "low cost" overseas companies. They are the ones clamoring for quotas and tariffs to "level the playing field." They have already lost, as somewhere there is a company already making their product. Probably better and cheaper.

Then there are the companies that are focused purely on traditional cost components, such as labor, and are globetrotting around the world to chase lower sources of those costs. They are oblivious, or choose to ignore, their internal process-related costs and waste, as well as the incremental supply chain costs that occur when outsourcing.

And finally there are the companies that accept the new reality and focus on themselves in order to create competitive advantage. These are the companies that passionately embrace lean methods to eliminate internal waste and harness the collective knowledge and creativity of their workers. They are extremely competitive in industries at all levels of the technology spectrum. A subset of these companies are the foreign-owned businesses that have also figured this out, and operate highly-competitive factories in the U.S.. Companies like Toyota, which just today announced that building new factories in the U.S. was part of it’s new $8.5 billion cost cutting program.

He talks about several areas that we have also touched on in this blog, primarily that U.S. companies that are chasing low labor costs by going to China are in for a surprise. The rapidly-growing Chinese economy is bringing higher costs… in terms of raw labor, regulations, and infrastructure. At the same time the problems with quality, intellectual property, and customer service remain although they are improving rapidly.

When companies jump on the China ship they usually do it via a collaboration with a Chinese company. In the past “collaboration” has generally meant that the Chinese company simply manufactures to an existing specification. But simple low cost sourcing is not truly collaboration or “partnering.” As labor costs increased, the Chinese company sometimes found themselves abandoned as their partner globe-trots to find a new even cheaper source of labor. The Chinese company loses, and the U.S. company has already lost by focusing purely on labor cost without understanding their other costs… such as a boatload of at-risk inventory sitting on the high seas.

There is a second reason to go to China, one that makes slightly more sense. That is to be closer to the customer, which in this case would be the Asian market. This is also one of the main reasons why foreign companies build factories in the U.S.. Unfortunately McGuire also believes the window of opportunity for finding collaborative partners is closing rapidly. He describes how the previous atmosphere of soliciting partnerships was missing on his latest trip. There are several potential reasons, but one is that Chinese companies are becoming increasingly willing, and able, to compete by themselves. They no longer need the marketing, business management, and technology development expertise offered by a partner.

In a globalized world, especially one interconnected with new internet technologies, the playing field is relatively flat. NAM may focus on minor differences in regulations, energy costs, and what-not and try to claim they are a significant "competitiveness burden", but they are not. One only needs to look at the companies in the U.S., both domestic- and foreign-owned, that are competitive in global markets.

The competitive advantage is created by a focus on internal process waste. Lean. Reducing the number of bureaucratic steps required to make a product, reducing lead times and cycle times from weeks to days, and creating single digit ppm-level quality creates major competitive advantage.

We’ve said it before, and we’ll keep on saying it. It’s time to stop whining and time to start figuring out how to be competitive over the long term. It’s not rocket science, and in fact it’s fairly simple. But it takes guts and a willingness to change and look deeply inward. Those companies that do will survive and prosper.